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EmPLOYEE OR CONTRaCTOR
Learn the difference
contractor in a company. The law treats an employee different to an independent contractor in several ways. As such, the distinction has wide reaching implications for a company.
Why the Difference Matters?
Mischaracterising employees as “contractors” when they are really your “employees” exposes your business to a number of significant legal liabilities and potentially damaging penalties when you fail to comply with obligations such as payment of superannuation, payroll tax, workcover, leave entitlements etc. Whether a worker is an employee or an independent contractor is determined by the type of arrangement and not the label that is given to the worker by a company. It is important that you ensure that workers are correctly classified so that you avoid potential investigation and prosecution under the Fair Work Act 2009 and taxation related laws.
Who is an employee? Who is an independent contractor?
According to Fair Work Ombudsman’s website, there are a number of factors which may contribute to determining the difference between an employee and an independent contractor. However, it is important to note that no single indicator can determine if a person is a contractor or an employee. Each determination is based on the individual merits of the work arrangement in place. Courts always look at the totality of the relationship between the parties when determining the status of a person’s employment. Some common indicators that may contribute to determining whether a person is an employee or independent contractor are as set out in the following table:
In the current volatile construction industry, many businesses have, as a cost cutting measure, turned to the services of independent contractor to meet their manpower needs instead of hiring employees. However, it is imperative to draw a clear line between an employee and an independent
Indicator
Degree of control over how work is performed
Hours of work
Expectation of work
Risk
Superannuation
Tools and equipment
Tax
Method of payment
Leave
Employee
Performs work, under the direction and control of their employer, on an ongoing basis.
Generally works standard or set hours (note: a casual employee’s hours may vary from week to week).
Usually has an ongoing expectation of work (note: some employees may be engaged for a specific task or specific period).
Bears no financial risk (this is the responsibility of their employer).
Entitled to have superannuation contributions paid into a nominated superannuation fund by their employer.
Tools and equipment are generally provided by the employer, or a tool allowance is provided.
Has income tax deducted by their employer.
Paid regularly (for example, weekly/ fortnightly/monthly).
Entitled to receive paid leave (for example, annual leave, personal/carers’ leave, long service leave) or receive a loading in lieu of leave entitlements in the case of casual employees.
Independent Contractor
Has a high level of control in how the work is done.
Under agreement, decides what hours to work to complete the specific task.
Usually engaged for a specific task.
Bears the risk for making a profit or loss on each task. Usually bears responsibility and liability for poor work or injury sustained while performing the task. As such, contractors generally have their own insurance policy.
Pays their own superannuation (note: in some circumstances independent contractors may be entitled to be paid superannuation contributions).
Uses their own tools and equipment (note: alternative arrangements may be made within a contract for services).
Pays their own tax and GST to the Australian Taxation Office.
Has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project.
Does not receive paid leave. continued...